Table of Contents

The Financial Crisis and the Regulation of Finance

The Financial Crisis and the Regulation of Finance

Edited by Christopher J. Green, Eric J. Pentecost and Tom Weyman-Jones

The 2007–08 financial crisis has posed substantial challenges for bankers, economists and regulators: was it preventable, and how can such crises be avoided in future? This book addresses these questions. The Financial Crisis and the Regulation of Finance includes a comprehensive overview of the crisis and reviews the theory and practise of regulation in the UK and worldwide. The contributors – all international experts on financial markets and regulation – provide perspectives and analysis on macro-prudential regulation, the regulation of financial firms, and the role of shareholders and disclosure.

Chapter 13: Asymmetries in Financial Information, Risk and Know-how: The Roles of Disclosure Rules, Financial Safety Nets and Market Discipline

Morten Balling

Subjects: economics and finance, financial economics and regulation, money and banking


13. Asymmetries in financial information, risk and knowhow: the roles of disclosure rules, financial safety nets and market discipline Morten Balling INTRODUCTION: FINANCIAL MARKETS ARE NOT INFORMATIONALLY EFFICIENT In financial theory, perfect capital markets are defined as being informationally efficient. In perfect markets, information is supposed to be costless and to be received simultaneously by all market participants. The definition of efficient capital markets is less restrictive. In efficient markets, prices are assumed to reflect all available relevant information. There are model versions with different degrees of market efficiency where it is possible to analyse the implications of the costs of information and delays in the distribution of information. A lot can be learned from theoretical models that assume capital market efficiency. According to random walk theory for example, investors are unable to earn an extra profit by studying the information flow from banks, listed companies and other data sources.1 In the real world, people and institutions have access to very different information sets and they do not receive the information simultaneously. Many have to pay for financial advice. They are exposed to different risks, and their knowledge about banking, finance and economics varies considerably. When people have different information, different risk exposures and when there are large differences in their understanding of banking and finance issues, we must expect them to behave differently. Asymmetries in information, risk and know-how have several explanations. Modern market economies are characterised by specialisation and division of labour between people and institutions with different...

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